Real world: A Taxing Time

- [Narrator] If I say the phrase "tax season" to you you likely imagine a period in spring leading up to the middle of April. This is, after all, when Tax Day falls, on or around April the 15th. However, what if I were to tell you that Tax Season was every season? What if I were to let slip that every day, even today, is Tax Day? How would that make you feel? Unsettled, alarmed? Well, knock it off! Those taxes paid for our roads, our hospitals, and other essential services. They also paid for my high school, and I turned out just fine, thank you very much. The point is: we pay taxes all year long, sales tax, gas tax, and even income tax. Picture in your mind a business—no, never mind. This is a video format; we'll do it together. Imagine SleepyTime Products Incorporated, a fictitious business. To be clear, it does not exist. But if it did, SleepyTime would make mattresses, pillows, hair bonnets, and eye masks. A cozy place, a comfy place. I would like to introduce you to two workers at SleepyTime Products, each of whom will showcase a different way of paying taxes. Keisha is a product engineer. She researches new mattress technologies. - [Keisha] Squishability of the mattress topper increases by 14% when we use the reticulated foam. Fascinating! - [Narrator] Keisha is a full-time employee. Over here in the sales department is Carlos. - [Customer] We're big fans of this bed. - I'm so glad you feel that way. We're very proud of these products. - [Customer] Oh, Carlos, what kind of bed do you use? - What's that? - [Customer] What bed do you use? - Oh, I sleep on the G20 Alpha. - [Customer] Oh, with the cooling wings! - Yeah, with the cooling wings, exactly. - [Narrator] Carlos is not a salaried, full-time employee. He is a contractor for SleepyTime. Keisha and Carlos make the same amount of income, but their tax arrangements are very different. When Keisha started at SleepyTime she was given an I-9 Form and a W-4 Form. But Carlos, Carlos the contractor, received only a W-9. Keisha's I-9 and Carlos's W-9 have the same function. They tell your employer that your eligible to work in the US so they can tell the IRS how much they paid you. The only difference is that the I-9 is for employees and the W-9 is for contractors. Picture a world in which taxes are subtracted from the paycheck of the American worker before that paycheck even hits their bank account. Picture a world in which you spend all year paying income taxes a little at a time so that by year's end you owe nothing at all. Submitted for your approval, Internal Revenue Service Form W-4. The W-4 Form that Keisha received helps her figure out how much of her paycheck should be withheld for income taxes. How much of each paycheck should she send right to the US Treasury to do her share of paying for roads and bridges and schools and drinking water. The more she withholds now the less she'll have to pay later. But if she overpays and withholds more than she owes in taxes she'll get more back later as a refund. - Okay, I've got a partner and kid at home. I'm not gonna withhold as much income for taxes because of the deductions I get for being married and having a child, more take-home pay it is. - [Narrator] Do you see? For Keisha, Tax Day occurs every payday. As a contractor Carlos doesn't get the same perks or benefits as Keisha does as a full-time employee, like employer-provided healthcare or contributions to a retirement account. He has to do his own tax withholding because SleepyTime Products' Accounting Department isn't doing it for him the way they are for Keisha. - Lucky me. - [Narrator] Carlos has to do his own withholding, combining his various sources of income to pay estimated quarterly taxes. Every three months he sends checks to the tax authorities in his state and to the federal government, paying a percentage based on the amount of money he expects to make that year. - Figuring that out was relatively easy. The IRS has a worksheet, 1040-ES. - [Narrator] Now, even though Carlos pays his taxes once a quarter and Keisha's come out of her paycheck automatically every two weeks, when January comes around SleepyTime Products sends out forms that detail how much money Carlos and Keisha made in the previous tax year. - Hello, what's this? - [Narrator] Carlos's 1099-MISC shows him how much SleepyTime Products paid him this tax year with no deductions. - Ah, got it. - [Narrator] Whereas Keisha's W-2 shows her not only how much SleepyTime Products paid her, but also how much of her income was withheld as taxes. - Woo, they had better name a train station after me or something. - [Narrator] Keisha and her partner rent their home, whereas Carlos is a homeowner. So, Carlos gets another tax form from his mortgage lender, Form 1098, showing how much he paid in interest on his mortgage this year. - Woo, they better name a bank branch after me or something. - [Narrator] Carlos is in luck however. The interest on his mortgage payment is deductible. The 1098 lets him subtract that number from his overall taxable income, thus lowering his tax burden. As the filing deadline of April 15th approaches Keisha and Carlos make preparations. Keisha runs the numbers. She's paid enough with her withholding throughout the year that she'll actually get a refund from the federal government. - Huh, I guess I overpaid. Looks like the orthodontist is finally getting that last payment. - [Narrator] Keisha has effectively been paying taxes all year long. Because of her elections on her W-4 Form money is subtracted from each paycheck and sent to the US Treasury. By the time April rolls around she's all settled up. However, Carlos had no withholding as a contractor, and he had a few more side gigs than he predicted that weren't covered by his estimated quarterly payments. Therefore, he owes money at the end of the year. - Hmm, so let's subtract my mortgage interest from my taxable income. Hey, all right, that's not as bad as I thought. - [Narrator] No, indeed Carlos. With a little planning and forethought there's no need to fear the taxman. Stride confidently into tomorrow in the knowledge that tomorrow is Tax Day, and so is the day after that, and the day after that, and the day after that. But don't worry, it's all going to be okay. (mellow music)